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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Commission file number 1-9595

BEST BUY CO., INC.

(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code 612-291-1000

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). ý Yes o No

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of August 27, 2004, was approximately $13.035 billion, computed by reference to the price at which the common equity was last sold on such date of $48.43 per share, as reported on the New York Stock Exchange-Composite Index. (For purposes of this calculation all of the registrant's directors and executive officers are deemed affiliates of the registrant.)

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. o Yes o No

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

As of April 25, 2005, the registrant had 327,786,000 shares of its Common Stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Definitive Proxy Statement dated May 20, 2005 (to be filed pursuant to Regulation 14A within 120 days after the Registrant's fiscal year-end of February 26, 2005), for the regular meeting of shareholders to be held on June 23, 2005 (Proxy Statement), are incorporated by reference into Part III.

Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), provide a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their companies. With the exception of historical information, the matters discussed in this Annual Report on Form 10-K are forward-looking statements and may be identified by the use of words such as "believe," "expect," "anticipate," "plan," "estimate," "intend" and "potential." Such statements reflect our current view with respect to future events and are subject to certain risks, uncertainties and assumptions. A variety of factors could cause our future results to differ materially from the anticipated results expressed in such forward-looking statements, including, among other things, general economic conditions, acquisitions and development of new businesses, product availability, sales volumes, profit margins, weather, foreign currency fluctuation, availability of suitable real estate locations, our ability to react to a disaster recovery situation, and the impact of labor markets and new product introductions on our overall profitability. Readers should review our Current Report on Form 8-K filed with the Securities and Exchange Commission (SEC) on March 18, 2004, that describes additional important factors that could cause future results to differ materially from those contemplated by the forward-looking statements made in this Annual Report on Form 10-K.

BEST BUY  FISCAL  2005  FORM 10-K

TABLE OF CONTENTS

PART I

Item 1. Business.

Description of Business

We are a specialty retailer of consumer electronics, home-office products, entertainment software, appliances and related services. We operate retail stores and commercial Web sites under the brand names Best Buy (BestBuy.com and BestBuyCanada.ca), Future Shop (FutureShop.ca), Magnolia Audio Video (MagnoliaAV.com) and Geek Squad (GeekSquad.com), as well as an outlet store on eBay.

Our vision is to make life fun and easy for consumers. Our business strategy is to bring technology and consumers together in a retail environment that focuses on educating consumers on the features and benefits of technology and entertainment products, while maximizing overall profitability. We believe our stores offer consumers meaningful advantages in store environment, product value, product selection and customer service, all of which advance our objectives of enhancing our business model, gaining market share and improving profitability. We believe that our four strategic initiatives (customer centricity, efficient enterprise, win with service and win in entertainment) will further enhance our business model. Additional information on our strategic initiatives is included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of this Annual Report on Form 10-K.

U.S. Best Buy

We were incorporated in the state of Minnesota in 1966 as Sound of Music, Inc., and changed our name to Best Buy Co., Inc. in 1983. We began as an audio components retailer and, with the introduction of the videocassette recorder in the early 1980s, expanded into video products. In 1983, we revised our marketing strategy and began using mass-merchandising techniques, which included offering a wider variety of products and operating stores under a "superstore" concept. In 1989, we dramatically changed our method of retailing by introducing a self-service, noncommissioned, discount-style store concept designed to give the customer more control over the purchasing process.

In fiscal 2000, we established our first online shopping site, BestBuy.com. Our "clicks-and-mortar" strategy is designed to empower consumers to research and purchase products seamlessly, either online or in retail stores. The BestBuy.com online shopping site offers products in all of our principal product groups.

The Best Buy store format has evolved to include more interactive displays and, for certain products, a higher level of customer service, with the latest version designed to increase labor efficiency and to improve merchandising. In fiscal 2000, we introduced a small-market Best Buy store concept that offers merchandise in the same product groups as larger stores, with a product assortment tailored to each respective community.

During the fiscal year ended February 26, 2005, we converted 67 existing U.S. Best Buy stores to our customer centricity operating model. Stores operating under the customer centricity model, also referred to as segmented stores, offer variations in product assortments, staffing, promotions and store design, and are tailored toward key customer segments. The segmented stores tailor their store merchandising, marketing and presentation to address specific customer groups, including affluent professional males, young entertainment enthusiasts who appreciate a digital lifestyle, upscale suburban moms, families who are practical technology adopters and small businesses with fewer than 20 employees. During fiscal 2006, we plan to open or convert 150 to 200 additional U.S. Best Buy stores to the customer centricity operating model, while rolling out key elements of customer centricity to all of our other U.S. Best Buy stores. Further, we are planning to complete the conversion of all of our U.S. Best Buy stores to the customer centricity operating model within three years.

Magnolia Audio Video

In fiscal 2001, we acquired Magnolia Hi-Fi, Inc., a Seattle-based, high-end retailer of audio and video products to access an upscale customer segment. During fiscal 2004, Magnolia Hi-Fi began doing business as Magnolia Audio Video. We believe the new name and

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redesigned logo are more representative of Magnolia Audio Video's image as an upscale retailer of high-end consumer electronics.

International Segment

Our International segment was established in connection with our acquisition of Canada's Future Shop Ltd. in fiscal 2002. The Future Shop acquisition provided us with an opportunity to increase revenue, gain market share and leverage our operational expertise in consumer electronics retailing. Since the acquisition, we have continued to build on Future Shop's position as the leading consumer electronics retailer in Canada. During fiscal 2003, we launched our dual-branding strategy in Canada by introducing the Best Buy brand. We believe the Canadian market can successfully support both brands.

Geek Squad

In fiscal 2003, we acquired Geek Squad, Inc. Geek Squad provides residential and commercial computer support services. We acquired Geek Squad to further our plans of providing technology support services to customers. At the end of fiscal 2005, Geek Squad service was available in all U.S. and Canadian Best Buy stores, as well as in six stand-alone Geek Squad stores. Geek Squad's operations were a small part of our fiscal 2005 business. However, our goal is to build Geek Squad into North America's largest provider of in-home computer repair, support and installation services, and we believe that over time it will become a more significant component of our business. At the end of fiscal 2005, we employed nearly 7,000 Geek Squad agents and plan to add another 5,000 agents during fiscal 2006. In addition, on April 27, 2005, we announced our plans to open 20 to 50 stand-alone Geek Squad stores during the next 12 to 18 months.

Musicland

We acquired Musicland Stores Corporation in fiscal 2001. The original strategy behind our Musicland acquisition was to bring Best Buy's core competencies in retailing consumer electronics to new customer segments, including segments typically underserved by our Best Buy stores. However, the Musicland acquisition did not meet our financial objectives. In fiscal 2004, we sold our interest in Musicland. The transaction resulted in the transfer of all of Musicland's assets other than a distribution center in Franklin, Indiana, and selected nonoperating assets. The sale of our interest in Musicland has allowed us to focus on our core businesses, which are our primary growth and profit drivers. Musicland's financial results have been classified separately as discontinued operations in our consolidated financial statements for all periods presented.

Acquisitions

All four acquisitions discussed above were accounted for using the purchase method. Under this method, net assets and results of operations of those businesses were included in our consolidated financial statements from their respective dates of acquisition. We have not made any major acquisitions since acquiring Geek Squad in fiscal 2003. However, we have begun exploring the opportunity of expanding outside of North America, including China. On April 27, 2005, we announced our plans to open lab stores in select major cities in China in the next 12 to 18 months.

General Development of Business

During our fiscal year ended February 26, 2005, there were no significant changes to our corporate structure or material changes in our mode of conducting the business.

Unless otherwise noted, the following discussion relates to continuing operations only.

Financial Information About Segments

During fiscal 2005, we operated two reportable segments: Domestic and International. The Domestic segment is comprised of U.S. Best Buy and Magnolia Audio Video operations. U.S. Best Buy stores offer a wide variety of consumer electronics, home-office products, entertainment software, appliances and related services. Magnolia Audio Video stores offer high-end audio and video products and services. The International segment is comprised of Future Shop and Best Buy operations in Canada. Future Shop and Canadian Best Buy stores offer

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products and services similar to those offered by U.S. Best Buy stores. However, Canadian Best Buy stores do not carry appliances.

Additional information regarding our "Segment Performance" is included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of this Annual Report on Form 10-K. In addition, selected financial data for our segments is available in Note 10, Segments, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

Reference is also made to Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of this Annual Report on Form 10-K for a discussion regarding the risks associated with foreign operations.

Domestic Segment

Overview

U.S. Best Buy

At February 26, 2005, we operated 668 U.S. Best Buy stores in 48 states and the District of Columbia that averaged approximately 42,300 retail square feet. Collectively, U.S. Best Buy stores totaled approximately 28.3 million retail square feet at the end of fiscal 2005, or about 90% of our total retail square footage. For fiscal 2005, U.S. Best Buy retail stores generated average revenue of approximately $38.6 million per store.

Magnolia Audio Video

At February 26, 2005, we operated 20 Magnolia Audio Video stores in California, Washington and Oregon that averaged approximately 9,700 retail square feet. Collectively, Magnolia Audio Video stores totaled approximately 194,000 retail square feet at the end of fiscal 2005, less than 1% of our total retail square footage. For fiscal 2005, Magnolia Audio Video retail stores generated average revenue of approximately $6.9 million per store.

Operations

U.S. Best Buy

U.S. Best Buy stores follow a standardized and detailed operating procedure called our Standard Operating Platform (SOP). The SOP includes procedures for inventory management, transaction processing, customer relations, store administration, product sales and services, and merchandise display. All stores function in exactly the same manner under the SOP. Further, in conjunction with the transformation to our customer centricity operating model, we are testing a new Adaptive Operating Platform (AOP). The AOP decentralizes authority and allows the person closest to the customer to make informed decisions. Under the AOP, there are variations in product offerings, staffing, promotions and store design.

U.S. Best Buy store operations are organized into three divisions. Each division is divided into regions and is under the supervision of a senior vice president who oversees store performance through regional vice presidents. Regional vice presidents have responsibility for a number of districts within their respective region, each of which is managed by a district manager. District managers monitor store operations and meet regularly with store managers to discuss merchandising, new product introductions, sales promotions, customer loyalty programs, employee satisfaction surveys and store operating performance. Similar meetings are conducted at the corporate level with divisional and regional management. Our President — Retail, North America, has overall responsibility for retail store processing and operations, including labor management. Each district also has a loss prevention manager, with product security personnel employed at each store to control physical inventory losses. Advertising, merchandise buying and pricing, as well as inventory policies for U.S. Best Buy stores, are centrally controlled.

U.S. Best Buy stores are generally open 78 hours per week, seven days a week. A store is typically staffed by one general manager and four to five assistant managers. The average staff per store in fiscal 2005 was approximately 120 employees and varied by store depending on sales productivity.

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Magnolia Audio Video

Magnolia Audio Video stores are typically managed by a store manager, an audio/video sales manager and, if the store contains mobile products, a mobile electronics sales manager. Magnolia Audio Video stores are generally open 72 hours per week, seven days a week. Depending on an individual store's volume and product offerings, store staffing includes seven to 27 commissioned sales personnel, one to six commissioned mobile electronics installers and one to seven sales support staff personnel. Corporate management for Magnolia Audio Video stores centrally controls advertising, merchandise buying and pricing, as well as inventory policies.

International Segment

Overview

At February 26, 2005, we operated 114 Future Shop stores throughout all Canadian provinces and 30 Canadian Best Buy stores in Ontario, Alberta, British Columbia, Manitoba and Saskatchewan. Collectively, International stores totaled approximately 3.1 million retail square feet at the end of fiscal 2005, or about 10% of our total retail square footage. For fiscal 2005, International retail stores generated average revenue of approximately $21.1 million per store.

The dual-branding strategy allows us to retain Future Shop's brand equity and attract more customers by offering a choice of store experiences. As we expand the presence of Best Buy stores in Canada, we expect to gain continued operating efficiencies through the leveraging of our capital investments, supply chain management, advertising, merchandising and administrative functions. Our goal is to reach differentiated customers with each brand by giving them the unique shopping experiences they desire. The primary differences between our two Canadian brands are:

In-store experience — The customer's interaction with store employees is different at each of the two brands. Future Shop stores have commissioned sales associates who take a more proactive role in assisting customers. Through their expertise and attentiveness, the sales associate drives the transaction. In contrast, Canadian Best Buy store employees are noncommissioned, and the stores offer more interactive displays and grab-and-go merchandising. This design allows the customer to drive the transaction as they experience the products themselves, with store employees available to demonstrate and explain product features.

Store size — At the end of fiscal 2005, the average Future Shop store was approximately 20,500 retail square feet, compared with an average of approximately 27,000 retail square feet for Canadian Best Buy stores. Canadian Best Buy stores generally have wider aisles, as well as more square footage devoted to entertainment software. Further, Canadian Best Buy stores do not carry appliances.

Operations

International stores use a standardized operating system. The operating system includes procedures for inventory management, transaction processing, customer relations, store administration, staff training and performance appraisal, as well as merchandise display. Advertising, merchandise buying and pricing, and inventory policies are centrally controlled.

During fiscal 2005, we introduced a new labor model within selected Future Shop stores. The new model provides more efficiency by creating balance between the sales and operational aspects of our business through the addition of supervisory positions and the realignment of management team roles. The new labor model retains the core Future Shop commissioned sales environment, while adding an hourly paid sales and merchandising team.

International store operations are organized to support two brands, each headed by a vice president. Each vice president has regional management who closely monitor store operations and meet regularly with store managers to review management and staff training programs, customer feedback and requests, store operating performance and other matters. Meetings involving store management, product managers, advertising, financial and administrative staff, as well as senior management, are held quarterly to review operating results and to establish future objectives.

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International stores are generally open 60 to 75 hours per week, seven days a week. A typical store is staffed by a general manager, several department managers, a customer service manager, and 48 to 95 staff associates, as well as part-time associates. The number of staff associates is dependent upon store size, sales volume and store brand.

Narrative Description of Business

Merchandise

U.S. Best Buy

U.S. Best Buy stores offer merchandise in four product groups: consumer electronics, home-office, entertainment software and appliances. Consumer electronics, the largest product group for fiscal 2005 based on revenue, consists of video and audio products. Video products include televisions, digital cameras, DVD players, digital camcorders and accessories. Audio products include MP3 players, car stereos, home theater audio systems, mobile electronics and accessories. The home-office product group includes desktop and notebook computers, telephones, networking and accessories. Entertainment software products include DVDs, video game hardware and software, CDs, computer software and subscriptions. The appliances product group includes major appliances as well as vacuums, small electrics and housewares.

We also provide a variety of in-store and in-home services related to the merchandise offered within the four product groups. In-store services include computer set-up, repair and software installation, as well as the installation of mobile electronics. In-home services include computer set-up, repair, software installation and home networking, and the delivery and installation of appliances and home theater systems. Services were not a significant part of our revenue in fiscal 2005. However, we believe that over time service revenue will become a more significant component of our business.

The following table presents U.S. Best Buy revenue, by product group, as a percentage of total U.S. Best Buy revenue:

Note: The above revenue mix table reflects the reclassification of MP3 players into the consumer electronics product group from the home-office product group.

Magnolia Audio Video

Magnolia Audio Video stores offer merchandise in two product groups: consumer electronics and home-office. Consumer electronics, the largest product group for fiscal 2005 based on revenue, consists of video and audio products. Video products include televisions, DVD players, digital broadcast satellite systems, digital camcorders, digital cameras and accessories. Audio products include home audio components, car stereos, mobile electronics, home theater audio systems and accessories. The home-office product group consists primarily of home theater furniture.

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The following table presents Magnolia Audio Video revenue, by product group, as a percentage of total Magnolia Audio Video revenue:

International

International stores offer merchandise in four product groups: consumer electronics, home-office, entertainment software and appliances. Consumer electronics, the largest product group for fiscal 2005 based on revenue, consists of video and audio products. Video products include televisions, digital cameras, DVD players, digital camcorders and accessories. Audio products include MP3 players, home audio components, car stereos, speakers and accessories. The home-office product group includes desktop and notebook computers, telephones and accessories.

Entertainment software products include DVDs, video game hardware and software, computer software and CDs. The appliances product group includes major appliances as well as small electrics, vacuums and housewares. Canadian Best Buy stores do not carry appliances.

Although the two store brands of our International segment carry similar product categories, there are differences in product brands and depth of selection within product categories. On average, approximately 45% of the product assortment (excluding entertainment software) overlaps between the two store brands.

The following table presents International revenue, by product group, as a percentage of total International revenue:

Note: The above revenue mix table reflects the reclassification of MP3 players into the consumer electronics product group from the home-office product group.

Distribution

U.S. Best Buy

Generally, U.S. Best Buy stores' merchandise, except for major appliances and large-screen televisions, is shipped directly from manufacturers to our distribution centers located in California, Georgia, Indiana, Minnesota, New York, Ohio, Oklahoma and Virginia. Major appliances and large-screen televisions are shipped to satellite warehouses in each major market. U.S. Best Buy stores are dependent upon the distribution centers for inventory storage and shipment of most merchandise. However, in order to meet release dates for selected products and to improve inventory management, certain merchandise is shipped directly to the stores from manufacturers and distributors. All inventory is bar-coded and scanned to ensure accurate tracking. In addition, a computerized inventory replenishment program is used to manage inventory levels at each store. On average, U.S. Best Buy stores receive product shipments two or three times a

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week, depending on sales volume. Contract carriers ship merchandise from the distribution centers to stores. Generally, e-commerce merchandise sales are either picked up at U.S. Best Buy stores or fulfilled directly to customers through our distribution centers.

Magnolia Audio Video

Magnolia Audio Video stores' merchandise is received and warehoused at either our distribution center in Washington, a regional warehouse in California or the U.S. Best Buy distribution center in California. All inventory is bar-coded and scanned to ensure accurate tracking. In addition, a computerized inventory replenishment program is used to manage inventory levels at each store. Merchandise is delivered to stores an average of three times each week pursuant to an in-house distribution system.

International

Our International stores' merchandise is shipped directly from suppliers to our distribution centers in British Columbia and Ontario. Our International stores are dependent upon the distribution centers for inventory storage and shipment of most merchandise. However, in order to meet release dates for selected products and to improve inventory management, certain merchandise is shipped directly to the stores from manufacturers and distributors. All inventory is bar-coded and scanned to ensure accurate tracking. In addition, a computerized inventory replenishment program is used to manage inventory levels at each store. Our International stores typically receive product shipments twice a week, with accelerated shipments during periods of high sales volume. Contract carriers ship merchandise from the distribution centers to stores.

Suppliers

Our strategy depends, in part, upon our ability to offer customers a broad selection of name-brand products and, therefore, our success is dependent upon satisfactory and stable supplier relationships. For fiscal 2005, our 20 largest suppliers accounted for over one-half of the merchandise we purchased, with five suppliers — Sony, Hewlett-Packard, Toshiba, eMachines and Samsung — representing approximately one-third of total merchandise purchased. The loss of or disruption in supply from any one of these major suppliers could have a material adverse effect on our revenue and earnings. We generally do not have long-term written contracts with our major suppliers. We have no indication that any of our suppliers will discontinue selling us merchandise. We have not experienced significant difficulty in maintaining satisfactory sources of supply, and we generally expect that adequate sources of supply will continue to exist for the types of merchandise sold in our stores.

We operate global sourcing offices in China in order to purchase products directly from Asian manufacturers. We expect these offices will allow us to increase our efficiency and provide us with the capability to offer private-label products that fill gaps in our existing product assortment. In the future, we expect purchases from our global sourcing offices to increase as a percentage of total purchases. We also believe that the expected increase in our global sourcing volumes will help drive gross profit rate improvements by lowering our overall product cost.

Store Development

The addition of new stores has played, and we believe will continue to play, a significant role in our growth and success. Our store development program has historically focused on entering new markets; adding stores within existing markets; and relocating, remodeling and expanding existing stores. During fiscal 2005, we opened 78 new stores, converted 67 existing U.S. Best Buy stores to our customer centricity operating model and relocated 10 other stores. While a majority of the new stores opened in fiscal 2005 were in existing markets, some were in new markets, including the opening of Canadian Best Buy stores in British Columbia and Saskatchewan. During fiscal 2005, we closed one U.S. Best Buy store and two Magnolia Audio Video stores.

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The following table reconciles U.S. Best Buy stores open at the beginning and end of each of the last five fiscal years:

The following table reconciles Magnolia Audio Video stores open at the beginning and end of each of the last five fiscal years:

The following table reconciles Future Shop stores open at the beginning and end of each fiscal year since the date of acquisition:

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As of the date of acquisition, November 4, 2001

The following table reconciles Canadian Best Buy stores open at the beginning and end of each fiscal year since inception of the International segment:

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During fiscal 2006, we expect to open 75 to 80 new stores in the United States and Canada. Most of the new stores will be opened in markets where we already have stores, leveraging our infrastructure and making shopping more convenient for our customers. We anticipate opening approximately 60 U.S. Best Buy stores, as well as relocating nine existing stores. We also expect to open 15 Best Buy stores in Canada, including seven stores in the greater Montreal market. In addition, we anticipate opening two Future Shop stores, as well as relocating five existing stores. Finally, during fiscal 2006, we expect that 150 to 200 U.S. Best Buy stores will be opened as or converted to our customer centricity operating model. On a long-term basis, we plan to operate at least 1,200 superstores in North America.

Additional information regarding our "Outlook for Fiscal 2006" is included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of this Annual Report on Form 10-K.

Intellectual Property

We believe we own valuable intellectual property including trademarks, service marks and tradenames, some of which are of material importance to our business, and include "Best Buy," "Yellow Tag" logo, "Geek Squad," "Future Shop" and "Magnolia Audio Video." Some of our intellectual property is the subject of numerous United States and foreign trademark and service mark registrations. We believe our intellectual property has significant value and is an important factor in the marketing of our Company, our stores and our Web sites. We are not aware of any facts that could negatively impact our continuing use of any of our intellectual property.

In accordance with accounting principles generally accepted in the United States (GAAP), our balance sheets include the cost of acquired intellectual property only. The only material acquired intellectual property presently included in our balance sheets is the Future Shop tradename, which had a carrying value of $40 million at the end of fiscal 2005. The value of the Future Shop tradename is based on the continuation of the Future Shop brand in Canada and currently is considered an indefinite-lived intangible asset. If we ever were to abandon the Future Shop brand, we would incur an impairment charge based on the then-carrying value of the Future Shop tradename.

Seasonality

Our revenue and earnings are typically greater during our fiscal fourth quarter, which includes the majority of the holiday selling season.

Working Capital

We fund the growth of our business through a combination of available cash and cash equivalents, short-term investments and cash flows generated from operations. In addition, our revolving credit facilities are available for additional working capital needs or investment opportunities.

Additional information regarding our "Liquidity and Capital Resources" is included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of this Annual Report on Form 10-K.

Customers

We do not have a significant concentration of sales with any individual customer and, therefore, the loss of any one customer would not have a material impact on our business. No single customer has accounted for 10% or more of our total revenue.

Backlog

Our stores and online shopping sites do not have a material amount of backlog orders.

Government Contracts

No material portion of our business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of any government.

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Competition

The consumer electronics retail industry is highly competitive. Our stores compete against other consumer electronics retailers, specialty home-office retailers, mass merchants, home improvement superstores and a growing number of direct-to-consumer alternatives. Our stores also compete against independent dealers, regional chain discount stores, wholesale clubs, video rental stores and other specialty retail stores. Mass merchants continue to increase their assortment of consumer electronics products, primarily those that are less complex to sell, install and operate. Similarly, large home improvement retailers are expanding their assortment of appliances. In addition, consumers are increasingly downloading entertainment and computer software directly via the Internet.

We compete principally on the basis of customer service; installation and support services; store environment, location and convenience; product assortment and availability; value pricing; and financing alternatives.

We believe our store experience, broad product assortment, store formats and brand marketing strategies differentiate us from most competitors by positioning our stores as the destination for new technology and entertainment products in a fun and informative shopping environment. Our stores compete by aggressively advertising and emphasizing a complete product and service solution, value pricing and financing alternatives. In addition, our trained and knowledgeable sales and service staffs allow us to tailor the offerings to meet the needs of our customers.

Research and Development

We have not engaged in any material research and development activities during the past three fiscal years.

Environmental Matters

We are not aware of any federal, state or local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, that have materially affected, or will materially affect, our net earnings or competitive position, or have resulted or will result in material capital expenditures. During fiscal 2005, there were no material capital expenditures for environmental control facilities and no such material expenditures are anticipated.

Number of Employees

At the end of fiscal 2005, we employed approximately 109,000 full-time, part-time and seasonal employees. We consider our employee relations to be good. There are currently no collective bargaining agreements covering any of our employees, and we have not experienced a strike or work stoppage.

Financial Information About Geographic Areas

We operate two reportable segments: Domestic and International. Financial information regarding the Domestic and International geographic areas is included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Note 10, Segments, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

Available Information

We are subject to the reporting requirements of the Exchange Act and its rules and regulations. The Exchange Act requires us to file reports, proxy statements and other information with the SEC. Copies of these reports, proxy statements and other information can be read and copied at:

SEC Public Reference Room
450 Fifth Street, N.W.
Washington, D.C. 20549

Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.

The SEC maintains a Web site that contains reports, proxy statements and other information regarding issuers that file electronically with the SEC. These materials may be obtained electronically by accessing the SEC's home page at http://www.sec.gov.

We make available, free of charge on our Web site, our Annual Report on Form 10-K, Quarterly Reports on

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Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file these documents with, or furnish them to, the SEC. These documents are posted on our Web site at www.BestBuy.com — under "Company Information," select the "For Our Investors" link and then the "SEC Filings" link.

We also make available, free of charge on our Web site, the charters of the Audit Committee, Compensation and Human Resources Committee, and Nominating, Corporate Governance and Public Policy Committee, as well as the Corporate Governance Principles and The Code of Business Ethics (including any amendment to, or waiver from, a provision of The Code of Business Ethics) adopted by our Board of Directors. These documents are posted on our Web site at www.BestBuy.com — under "Company Information," select the "For Our Investors" link and then the "Corporate Governance" link.

References to our Web site addresses do not constitute incorporation by reference of the information contained on the Web sites, and such information is not part of this document.

Copies of any of the above-referenced information will also be made available, free of charge, by calling (612) 291-6111 or upon written request to:

Best Buy Co., Inc.
Investor Relations Department
7601 Penn Avenue South
Richfield, MN 55423-3645

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Item 2. Properties.

Stores, Distribution Centers and Corporate Facilities

The following table summarizes the geographic location of our stores at the end of fiscal 2005:

Note: At the end of fiscal 2005, we owned 37 of our U.S. Best Buy stores and three of our Canadian Best Buy stores. All other stores at the end of fiscal 2005 were leased.

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Domestic Segment

U.S. Best Buy Stores

At the end of fiscal 2005, we operated 668 U.S. Best Buy stores, totaling approximately 28.3 million retail square feet.

U.S. Best Buy stores were serviced by the following distribution centers at the end of fiscal 2005:

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During fiscal 2005, we opened a new distribution center in Ardmore, Oklahoma. The new and larger distribution center replaced a 566,000-square-foot owned distribution center also located in Ardmore. We believe the new facility will allow us to meet the expected increased demand for technology products.

We lease space in 13 satellite warehouses in major metropolitan markets for home delivery of major appliances and large-screen televisions. U.S. Best Buy stores utilize approximately 2.7 million square feet in these warehouses.

Our principal corporate office is located in Richfield, Minnesota, and is an owned facility consisting of four interconnected buildings totaling approximately 1.5 million square feet. We continue to own a facility in Eden Prairie, Minnesota, totaling approximately 360,000 square feet, which previously served as our principal corporate office. This facility is currently for sale. At the end of fiscal 2005, we also leased approximately 340,000 square feet of additional office space.

Magnolia Audio Video

At the end of fiscal 2005, we operated 20 Magnolia Audio Video stores, totaling approximately 194,000 retail square feet.

We lease an 80,000-square-foot distribution, warehouse and office facility in Kent, Washington, of which approximately 54,000 square feet are used for distribution and warehouse operations, with the remainder dedicated to a service department and corporate administrative functions. In addition, we utilize a 13,000-square-foot leased regional warehouse in Hayward, California, and 45,000 square feet of the U.S. Best Buy distribution center in Dinuba, California, is dedicated for use by Magnolia Audio Video.

International Segment

At the end of fiscal 2005, we operated 114 Future Shop stores and 30 Canadian Best Buy stores, totaling approximately 3.1 million retail square feet.

The operations of the International segment are serviced by two distribution centers located in Langley, British Columbia, and Brampton, Ontario. The 413,000-square-foot distribution center in British Columbia is owned, while the 1,041,000-square-foot distribution center in Ontario is leased. During fiscal 2005, we expanded the Ontario distribution center from 418,000 square feet to meet the expected increase in future demand for merchandise generated from the growth of the International segment business.

Corporate offices for the International segment are located in a 141,000-square-foot leased facility in Burnaby, British Columbia. At the end of fiscal 2005, we also leased 35,000 square feet of additional office space for various International segment regional offices in Ontario, Quebec, British Columbia and Alberta. During fiscal 2006, we expect to open two regional offices in Alberta and Quebec, totaling approximately 18,000 square feet.

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Global Sourcing

In support of our global sourcing initiative, we leased office space in China totaling approximately 15,000 square feet at the end of fiscal 2005.

Operating Leases

Almost all of our stores and a majority of our distribution facilities are leased. Terms of the lease agreements generally range up to 20 years. Most of the leases contain renewal options and escalation clauses.

Additional information regarding our operating leases is available in Note 7, Leases, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

Item 3. Legal Proceedings.

On April 12, 2005, the U.S. District Court for the District of Minnesota entered an Order dismissing with prejudice In Re Best Buy Company, Inc. Securities Litigation, the purported consolidated class action lawsuit that sought compensatory damages, costs and expenses on behalf of persons who purchased our securities between January 9, 2002, and August 7, 2002. The lawsuit alleged that the defendants, Best Buy Co., Inc., and our Chairman, our two Vice Chairmen (including our Vice Chairman and Chief Executive Officer) and our Chief Financial Officer, violated Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder, by making material misrepresentations between January 9, 2002, and August 7, 2002, that resulted in artificially inflated prices of our common stock. Subject to plaintiffs' right to appeal the Court's Order, this matter is resolved. We believe the allegations are without merit and, in the event of an appeal, intend to continue to defend this action vigorously.

We were also served with a shareholder derivative action venued in Hennepin County District Court, State of Minnesota, which raises many factual matters similar to those raised in the federal securities law case, above described. This case alleges violations of state law relative to fiduciary responsibilities, control and management of our company and unjust enrichment and seeks judgment in favor of Best Buy Co., Inc. against certain named officer and director defendants for damages, equitable relief and attorneys' fees, costs and expenses. By agreement between the parties, this case has been on inactive status pending a decision on our Motion to Dismiss in the referenced federal securities law case. If the plaintiffs don't agree to dismiss the action voluntarily, then we expect the named officer and director defendants to file a Motion to Dismiss. Based on our information and belief, the claims against the named officer and director defendants are without merit and, if necessary, will be vigorously defended.

We are involved in various other legal proceedings arising in the normal course of conducting business. The resolution of those proceedings is not expected to have a material impact on our results of operations or financial condition.

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Executive Officers of the Registrant:
(Ages as of February 26, 2005)

Bradbury H. Anderson has been a director since August 1986 and is currently our Vice Chairman and Chief Executive Officer. He assumed the responsibility of Chief Executive Officer in June 2002, having previously served as President and Chief Operating Officer since April 1991. He has been employed in various capacities with us since 1973. In addition, he serves on the board of the Retail Industry Leaders Association, as well as on the boards of the American Film Institute, Junior Achievement, Minnesota Public Radio and Waldorf College.

Richard M. Schulze is a founder of Best Buy. He has been an officer and director from our inception in 1966 and currently is Chairman of the Board. Effective in June 2002, he relinquished the duties of Chief Executive Officer, an office he had held since February 1983. He is on the Board of Trustees of the University of St. Thomas, chairman of its Executive and Institutional Advancement Committee, and a member of its Board Affairs Committee. Mr. Schulze is also chairman of the Board of Governors of the University of St. Thomas Business School.

Allen U. Lenzmeier has been a director since February 2001. He joined us in 1984 and is currently our Vice Chairman. Prior to his promotion to his current position, he served as President and Chief Operating Officer from 2002 to 2004, President of Best Buy Retail Stores from 2001 to 2002 and as Executive Vice President and Chief Financial Officer from 1991 to 2001. He serves on the board of UTStarcom, Inc. He is also a national trustee for the Boys and Girls Clubs of America and serves on its Twin Cities board of directors, and serves on the Catholic Community Foundation of the Archdiocese of St. Paul and Minneapolis. Mr. Lenzmeier has announced his intention to retire at the beginning of fiscal 2007, which commences on February 26, 2006.

Brian J. Dunn was named President — Retail, North America in December 2004. Mr. Dunn joined us in 1985 and has served as Executive Vice President, Senior Vice President, Regional Vice President, regional manager, district manager and store manager.

Kevin T. Layden was named President and Chief Operating Officer — Best Buy Canada (formerly Future Shop Ltd.) in 1999. Mr. Layden joined us in 1997 as Vice President — Merchandising. Prior to joining us, he spent approximately 17 years with Circuit City Stores, Inc.

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serving in positions of increasing responsibility, including most recently as Assistant Vice President and General Manager for New York.

Shari L. Ballard was named Executive Vice President — Human Capital and Leadership in December 2004. Ms. Ballard joined us in 1993 and has served as Senior Vice President, Vice President, and general and assistant store manager.

Ronald D. Boire joined us in June 2003 as Executive Vice President and General Merchandise Manager. Prior to joining us, he spent 17 years at Sony Electronics Inc., where he held various executive, sales and marketing positions before becoming president of Sony's Personal Mobile Products Company. Most recently, he was president of the Sony Electronics Consumer Sales Company, and was responsible for managing sales and distribution of Sony's consumer electronics products throughout the United States. Mr. Boire also was a member of Sony's operations committee.

Thomas C. Healy was named Executive Vice President — Best Buy for Business in December 2004. Mr. Healy joined us in 1990 and has held positions as President — Best Buy International, Senior Vice President, Regional Vice President, district manager and store manager.

Darren R. Jackson was named Chief Financial Officer in February 2001. Mr. Jackson joined us in 2000 as Senior Vice President — Finance and Treasurer. Prior to that, Mr. Jackson served as chief financial officer of the Full-Line Store Division at Nordstrom, Inc. from 1998 to 2000 and as chief financial officer of Carson Pirie Scott & Co. Inc., a department store chain, from 1996 to 1998. A certified public accountant, Mr. Jackson has 18 years of experience in the retail industry. Mr. Jackson serves as a director of Advanced Auto Parts, Inc. and serves on the Marquette University Board of Trustees.

Michael A. Linton was promoted to Executive Vice President — Consumer and Brand Marketing and Chief Marketing Officer in March 2002. Mr. Linton joined us in 1999 as Senior Vice President — Strategic Marketing. Prior to that, Mr. Linton held positions as vice president of marketing at Remington Products Corporation, a maker of personal care and grooming products; vice president and general manager of a product category at James River Corporation, a manufacturer and marketer of consumer products, food and packaging; and a general manager at Progressive Insurance. Mr. Linton began his career at Procter & Gamble Company. Mr. Linton also serves as a director of Peet's Coffee & Tea.

Michael London was named Executive Vice President — Sourcing and Alliances in December 2004. He served as Executive Vice President — Global Sourcing from February 2004 to December 2004 and Executive Vice President — Customer Centricity from July 2003 to February 2004. Prior to that, he served as Executive Vice President — General Merchandise Manager from 2001 to 2003, as Senior Vice President — General Merchandise from 1998 to 2001 and as Vice President — General Merchandise from 1996 to 1998. Prior to joining us in 1996, Mr. London was a senior vice president for NordicTrack, a fitness equipment manufacturer, and executive vice president for Central Tractor Farm & Country, a specialty farm products retail supplier.

John C. Walden was named Executive Vice President — Customer Business Group in December 2004. Mr. Walden served as Executive Vice President — Human Capital and Leadership from 2002 to 2004 and President of BestBuy.com, Inc. from 1999 to 2002. Prior to joining us in 1999, Mr. Walden served as chief operating officer of Peapod, Inc., an Internet retailer of groceries. Mr. Walden has also held executive positions with Ameritech Corporation, a telecommunications company, and Storage Technology Corporation, a maker of data storage products. Earlier he practiced corporate and securities law with Sidley, Austin, Brown and Wood LLP.

Robert A. Willett became our Executive Vice President — Operations in April 2004. In April 2002, we engaged Mr. Willett as a consultant and special advisor to our Board of Directors on matters relating to operational efficiency and excellence. Prior to that, he was the global managing partner for the retail practice at Accenture LLP, a global management consulting, technology services and outsourcing company, and was also a member of its executive committee. Mr. Willett began his career as a store manager at Marks & Spencer P.L.C., a British department store chain, and has held executive positions at F.W. Woolworth & Co., as well as several other retailers in the United Kingdom.

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Susan S. Hoff was named Senior Vice President and Chief Communications Officer in April 2004. Previously, she had served as Senior Vice President — Public Affairs and Investor Relations Officer since 2000. Since joining us in 1983, Ms. Hoff has served in various capacities including Vice President of Corporate Communications and Public Relations.

Joseph M. Joyce was promoted to Senior Vice President — General Counsel and Assistant Secretary in 1997. Mr. Joyce joined us in 1991 as Vice President — Human Resources and General Counsel. Prior to joining us, Mr. Joyce was with Tonka Corporation, a toy maker, having most recently served as vice president, secretary and general counsel.

Item 4. Submission of Matters to a Vote of Security Holders.

There were no matters submitted during the fourth quarter of the fiscal year ended February 26, 2005, to a vote of security holders, through the solicitation of proxies or otherwise.

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Part II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

Our common stock is traded on the New York Stock Exchange under the ticker symbol BBY. The table below sets forth the high and low sales prices of our common stock on the New York Stock Exchange during the periods indicated.

Holders

As of April 25, 2005, there were 2,672 holders of record of Best Buy common stock.

Dividends

In the third quarter of fiscal 2004, our Board of Directors declared the Company's first-ever cash dividend, including the initiation of a regular quarterly cash dividend of $0.10 per common share. A special dividend payment of $0.30 per common share was paid in the fourth quarter of fiscal 2004. In addition, the first regular quarterly cash dividend of $0.10 was paid in the fourth quarter of fiscal 2004, and a quarterly cash dividend has been paid in each subsequent quarter. In the second quarter of fiscal 2005, we increased our quarterly cash dividend from $0.10 to $0.11 per common share effective with the quarterly cash dividend paid in the third quarter of fiscal 2005. The payment of cash dividends is subject to customary legal and contractual restrictions.

Future dividend payments will depend on the Company's earnings, capital requirements, financial condition and other factors considered relevant by our Board of Directors.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

In June 2004, our Board of Directors authorized a $500 million share repurchase program. The new program, which became effective on June 24, 2004, terminated and replaced the $400 million share repurchase program authorized by our Board of Directors in fiscal 2000. During the fourth quarter of fiscal 2005, we purchased and retired 467,000 shares at a cost of $26 million. Since the inception of the $500 million share repurchase program in fiscal 2005, we purchased and retired 2.3 million shares at a cost of $118 million. We consider several factors in determining when to make share repurchases including, among other things, our cash needs and the market price of the stock. At the end of fiscal 2005, $382 million of the $500 million originally authorized by our Board of Directors was available for future share repurchases. Cash provided by future operating activities, available cash and cash equivalents, as well as short-term investments, are the expected sources of funding for the share repurchase program.

In April 2005, our Board of Directors authorized the purchase of up to $1.5 billion of our common stock from time to time through open market purchases. This share repurchase program has no stated expiration date. The $1.5 billion share repurchase program terminated and replaced the $500 million share repurchase program authorized by our Board of Directors in June 2004.

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The following table presents the total number of shares repurchased during the fourth quarter of fiscal 2005 by fiscal month, the average price paid per share, the number of shares that were purchased as part of a publicly announced repurchase plan, and the approximate dollar value of shares that may yet be purchased pursuant to the $500 million share repurchase program as of the end of fiscal 2005:

⁽¹⁾

Pursuant to a $500 million share repurchase program announced on June 24, 2004.

Additional information regarding our share repurchase program is included in the "Liquidity and Capital Resources" and "Outlook for Fiscal 2006" sections of Management's Discussion and Analysis of Financial Condition and Results of Operations, included as Item 7 of this Annual Report on Form 10-K.

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Item 6. Selected Financial Data.

The following table presents our selected financial data. The table should be read in conjunction with Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Certain prior-year amounts have been reclassified to conform to the current-year presentation. All fiscal years presented reflect the classification of Musicland's financial results as discontinued operations.

Five-Year Financial Highlights

$ in millions, except per share amounts

⁽¹⁾

Fiscal 2001 included 53 weeks. All other periods presented included 52 weeks.

Footnotes continue on page 22.

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$ in millions, except per share amounts

(footnotes continued)

⁽²⁾

During the fourth quarter of fiscal 2005, following a review of our lease accounting practices, we recorded a cumulative charge of $36 pre-tax ($23 after-tax) to correct our accounting for certain operating lease matters. Additionally, we established a sales return liability which reduced gross profit by $15 pre-tax ($10 after-tax). Finally, we reclassified certain transportation and distribution costs from selling, general and administrative expenses to cost of goods sold and reclassified comparable amounts for prior periods to conform to the current presentation.

⁽³⁾

During the third quarter of fiscal 2002, we acquired Future Shop Ltd. During the fourth quarter of fiscal 2001, we acquired Musicland Stores Corporation and Magnolia Hi-Fi, Inc., which began doing business as Magnolia Audio Video during fiscal 2004. The results of operations of these businesses are included from their respective dates of acquisition. Musicland's financial results are included in discontinued operations.

⁽⁴⁾

Effective on March 3, 2002, we adopted Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. During fiscal 2003, we completed the required goodwill impairment testing and recognized an after-tax, noncash impairment charge of $40 that is reflected in our fiscal 2003 financial results as a cumulative effect of a change in accounting principle. Also effective on March 3, 2002, we changed our method of accounting for vendor allowances in accordance with Emerging Issues Task Force (EITF) Issue No. 02-16, Accounting by a Reseller for Cash Consideration Received from a Vendor. The change resulted in an after-tax, noncash charge of $42 that also is reflected in our fiscal 2003 financial results as a cumulative effect of a change in accounting principle. Refer to Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Prior fiscal years have not been restated to reflect the pro forma effects of these changes.

⁽⁵⁾

Earnings per share is presented on a diluted basis and reflects a three-for-two stock split in May 2002. During the fourth quarter of fiscal 2005, we adopted Emerging Issues Task Force (EITF) Issue No. 04-08, The Effect of Contingently Convertible Instruments on Diluted Earnings per Share. The calculation of diluted earnings per share assumes the conversion of our convertible debentures, due in 2022, into 5.8 million shares of common stock and adds back the related after-tax interest expense. Prior fiscal years have been restated to reflect the adoption of EITF Issue No. 04-08.

⁽⁶⁾

Comprised of revenue at stores and Web sites operating for at least 14 full months, as well as remodeled and expanded locations. Relocated stores are excluded from the comparable store sales calculation until at least 14 full months after reopening. Acquired stores are included in the comparable store sales calculation beginning with the first full quarter following the first anniversary of the date of acquisition. The calculation of the comparable store sales percentage gain excludes the impact of fluctuations in foreign currency exchange rates.

In the third quarter of fiscal 2004, we refined our methodology for calculating our comparable store sales percentage change. It now reflects the impact of non-point-of-sale (non-POS) revenue transactions. We refined our comparable store sales calculation in light of changes in our business. Previously, our comparable store sales calculation was based on store POS revenue. The comparable store sales changes for fiscal 2005 and fiscal 2004 have been computed using the refined methodology. The comparable store sales changes for prior fiscal years have not been computed using the refined methodology. Refining the methodology for calculating our comparable store sales percentage change did not impact previously reported revenue, net earnings or cash flows.

⁽⁷⁾

Includes both continuing and discontinued operations. The current ratio is calculated by dividing total current assets by total current liabilities.

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

We believe transparency and understandability are the primary goals of successful financial reporting. We remain committed to continuously increasing the transparency of our financial reporting, providing our shareholders with informative financial disclosures and presenting an accurate view of our financial position and operating results.

In accordance with Section 404 of the Sarbanes-Oxley Act of 2002, our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of our internal control over financial reporting and concluded that such controls were effective as of February 26, 2005. Our independent registered public accounting firm expressed an unqualified opinion on management's assessment on the effectiveness of our internal control over financial reporting. Management's report on the effectiveness of our internal control over financial reporting and the related report of our independent registered public accounting firm are included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in nine sections:

•

Overview



•

Strategic Initiatives



•

Results of Operations



•

Liquidity and Capital Resources



•

Off-Balance-Sheet Arrangements and Contractual Obligations



•

Critical Accounting Estimates



•

New Accounting Standards



•

Quarterly Results and Seasonality



•

Outlook for Fiscal 2006

We believe our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

Overview

Best Buy Co., Inc. is a specialty retailer of consumer electronics, home-office products, entertainment software, appliances and related services.

We operate two reportable segments: Domestic and International. The Domestic segment is comprised of the operations of U.S. Best Buy and Magnolia Audio Video. U.S. Best Buy stores offer a wide variety of consumer electronics, home-office products, entertainment software, appliances and related services, operating 668 stores in 48 states and the District of Columbia at the end of fiscal 2005. Magnolia Audio Video stores offer high-end audio and video products and services from 20 stores located in California, Washington and Oregon at the end of fiscal 2005. Magnolia Audio Video was acquired in the fourth quarter of fiscal 2001.

The International segment was established in connection with our acquisition of Future Shop in the third quarter of fiscal 2002. At the end of fiscal 2005, the International segment consisted of 114 Future Shop stores operating throughout all Canadian provinces and 30 Canadian Best Buy stores operating in Ontario, Alberta, British Columbia, Manitoba and Saskatchewan. Future Shop and Canadian Best Buy stores offer products and services similar to those offered by U.S. Best Buy stores, although Canadian Best Buy stores do not sell appliances.

In support of our retail store operations, we also operate Geek Squad, a provider of in-home computer repair, support and installation services, Web sites for each of our brands (BestBuy.com, BestBuyCanada.ca, FutureShop.ca, MagnoliaAV.com and GeekSquad.com) and an outlet store on eBay.

Strategic Initiatives

During fiscal 2005, we advanced four strategic initiatives that we believe will further enhance our business model

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over the next several years and contribute to us achieving our annual operating income rate goal of 7% of revenue for fiscal 2008. The four strategic initiatives are:

•

Customer Centricity



•

Efficient Enterprise



•

Win with Service



•

Win in Entertainment

Before we discuss each of our four strategic initiatives in greater detail, we'd like to first provide an update on our 7% operating income rate goal. During fiscal 2004, we announced our goal of increasing our annual operating income rate to 7% of revenue for fiscal 2007, while continuing to deliver double-digit revenue growth. While we still are focused on delivering an annual operating income rate of 7% of revenue, we now believe that it is more likely to be attained for fiscal 2008, rather than fiscal 2007. We extended this timeframe due to the expected impact of the adoption of Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (123(R)), which we plan to adopt effective for the first quarter of fiscal 2006, as well as the need to make additional investments in our business in the short-term in order to achieve our long-term goals. We believe that it is critical to accelerate our customer centricity initiative, expand our services business, boost retention of employees, add individualized marketing capabilities, and simplify our supply chain and information technology systems.

Our operating income rate for fiscal 2005 was 5.3% of revenue, consistent with our operating income rate for fiscal 2004. In order to accomplish our goal of increasing our annual operating income rate to 7% of revenue for fiscal 2008, we believe we must increase the profitability of our International segment; improve our supply chain, global sourcing, merchandising and pricing effectiveness; realize the anticipated benefits from our efficient enterprise strategy; and successfully roll out our customer centricity initiative. We believe that increasing our International segment's annual operating income rate to 5% of revenue would add up to 0.4% of revenue to our consolidated annual operating income rate. In addition, we believe that supply chain improvements, such as more accurate demand forecasting and direct importing, as well as sourcing opportunities and private-labeled products, could add up to 0.5% of revenue to our annual operating income rate. Next, we believe the strategic relationships we formed in 2004 with Accenture LLP (Accenture), discussed in greater detail below, could increase our annual operating income rate by as much as 0.5% of revenue. Further, we believe that our organic growth through the customer centricity initiative will generate significant comparable store sales gains, which could help us leverage our cost structure and could increase our annual operating income rate by approximately 0.5% of revenue. Additionally, the lessons learned in rolling out our segmented stores will be applied as we convert additional existing U.S. Best Buy stores to the customer centricity operating model.

Our progress toward achieving the goal of an annual 7% operating income rate is not expected to be perfectly linear; however, we expect to make progress each fiscal year. Finally, we remain focused on double-digit revenue growth and an earnings growth rate of at least 15%.

Customer Centricity

Our customers are at the core of all of our business strategies, and our customer centricity initiative is the most important of our four strategic initiatives. In short, customer centricity means focusing on the customer. The customer centricity initiative includes identifying profitable customer segments, tailoring our store experience to satisfy their needs, and training our employees to think and behave as owner/operators. We believe that we can extend our competitive advantage by engaging more fully with our customers, offering them broader and deeper assortments than our competitors, and supporting their shopping experiences with a full array of services. Our goal is to maximize every customer touch point, including store visits, phone calls, online visits and in-home visits.

We believe the customer centricity operating model offers our customers a richer in-store experience, including better shopping assistance as well as more of the products and services they want. Customer centricity empowers employees to recognize unique sets of customers and to build offerings and experiences to meet their needs. Our employees also like this model because it gives them more power to make decisions about how to satisfy their customers. Over time, we believe that our customer centricity initiative will attract new customer segments to our stores, which would leverage our existing assets.

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In October 2004, we converted 67 U.S. Best Buy stores to the customer centricity operating model. At the end of fiscal 2005, a total of 85 U.S. Best Buy stores were operating under the customer centricity model, including 18 lab stores which continue to develop ideas to serve customers better. During fiscal 2006, we plan to open or convert 150 to 200 additional U.S. Best Buy stores to the customer centricity operating model. Each of these stores is expected to include elements designed to appeal to one or two of our five existing key customer segments, including affluent professional males, young entertainment enthusiasts who appreciate a digital lifestyle, upscale suburban moms, families who are practical technology adopters and small businesses with fewer than 20 employees. In addition, during fiscal 2006 we anticipate rolling out key elements of customer centricity to all of our other U.S. Best Buy stores. Finally, we are planning to complete the conversion of all of our U.S. Best Buy stores to the customer centricity operating model within three years.

The successful rollout of our customer centricity initiative is a critical component in our goal of increasing our annual operating income rate to 7% of revenue for fiscal 2008. For the portion of fiscal 2005 in which they operated under the customer centricity operating model, the 67 segmented stores collectively reported a comparable stores sales increase of 8.2%, compared with a comparable store sales gain of 1.9% at other U.S. Best Buy stores during the same period. Further, as expected the gross profit rate at the 67 stores, collectively, was higher than that of other U.S. Best Buy stores for the portion of fiscal 2005 in which they operated under the customer centricity operating model, driven primarily by a more profitable revenue mix. However, due to one-time conversion costs and a higher expense structure, the selling, general and administrative expenses (SG&A) rate for the 67 stores, collectively, was higher than that of other U.S. Best Buy stores for the same period, resulting in an operating income rate for the period that was less than that of other U.S. Best Buy stores.

We continue to make improvements in our customer centricity operating model, including refining our store labor model. We believe the profitability of stores operating under the customer centricity platform will improve over time, similar to our historical experience with new-store openings.

Efficient Enterprise

The purpose of our efficient enterprise initiative is to reduce our cost structure, increase our speed to market and improve the returns we achieve on our capital investments.

During fiscal 2005, we completed a comprehensive evaluation of our information technology capabilities. We concluded that new, flexible systems that could support business innovation were needed for us to continue to compete effectively in the rapidly changing retail environment. We then began to evaluate strategic options for delivering information technology and other corporate support services. After considering various options and conducting due diligence, we engaged Accenture in July 2004 to provide us with consulting services, as well as support and development services in the information technology area, to further enable our anticipated transformation to a more efficient, customer-centric business model. We selected Accenture based on our historical track record of successful joint projects and our confidence in Accenture's ability to help us deliver results.

Under our July 2004 seven-year agreement with Accenture, Accenture will manage and further develop the full scope of our information technology operations. As part of the agreement, we plan to optimize our supply chain management capabilities, enhance the vendor management of our customer call centers, expand the functionality of our Web sites and improve the reporting for our customer centricity initiative. We expect the agreement with Accenture will result in a new and easier-to-manage operating platform that will reduce our risk and cost structure, including our total cost of ownership for information technology systems.

Our other fiscal 2005 efficient enterprise accomplishments included:

•

Engaged Accenture to assist us with improving our operational capabilities and reducing our costs in the human resources area



•

Reduced fixed headcount



•

Lowered health care costs



•

Increased the productivity of our store labor



•

Reduced the cost to construct new retail store locations, and

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•

Changed our retail field organization structure and made certain changes to our executive organization structure designed to accelerate our business strategy by aggregating resources in three key growth areas: retail sales channels, customer business groups (including our customer centricity initiative), and the development of future growth platforms.

We anticipate that the efficient enterprise initiative will enable us to improve our annual operating income rate by as much as 0.5% of revenue.

Win with Service

Our customers' technology needs are becoming more complex with the rapid development of new products. In addition, consumers wish to manage their movies, music, photographs and games centrally and to access them through multiple devices throughout their home. Our win with service initiative focuses on creating a market-leadership position in delivering lifestyle-based solutions for our customers. We are committed to selling, installing and supporting technologies that create an integrated digital home. We believe this approach will differentiate us from many of our competitors who sell technology products, but do not provide installation and support services. Our goal is to create a life-long relationship with our customers and deliver to them a broad product selection, home integration capabilities, service and technology upgrades. By expanding and strengthening our service offerings, we believe that we will boost customer traffic, raise our gross profit rate and improve customer loyalty while strengthening our competitive advantage.

Geek Squad, our 24-hour rapid-response computer support task force, is now available in every U.S. and Canadian Best Buy store. We employ nearly 7,000 Geek Squad agents, and in fiscal 2006, we expect to add another 5,000 agents. Our goal is to make Geek Squad North America's largest provider of in-home computer repair, support and installation services. We also intend to expand our in-home integration services and to offer new Geek Squad services — including network installations, server installations and server maintenance services — to small businesses in select markets. During fiscal 2006, we are planning to strengthen our home theater installation business based on what we have learned from the Geek Squad. Our goal is to deliver the ultimate experience in home theater for our customers.

Win in Entertainment

Our fourth strategic initiative is focused on gaining market share in the rapidly changing entertainment software product group. This product group includes music, movies, video game hardware and software, computer software, subscriptions and other related products. The development and delivery of entertainment products have undergone significant changes in recent years. Our win in entertainment initiative includes supporting the development and delivery of new entertainment-related products through multiple distribution channels to increase our market share. We want to be the consumer's preferred choice when purchasing entertainment products. Our strategy for achieving this goal continues to focus on selection, offering customers a wide variety of products and services, and helping customers match the service and technology for the best-possible experience.

In support of this initiative, we continued to increase our offerings of online entertainment services and subscriptions in fiscal 2005. We also offered an exclusive music DVD from Elton John. During fiscal 2006, we expect to grow our market share in entertainment software by devoting more selling space in our stores to DVDs and video games, and capitalizing on the introduction of new video game hardware. We also anticipate continuing to enhance our entertainment offerings, including the introduction of tailored market assortments, and to pursue exclusive arrangements.

Results of Operations

Fiscal 2005 Accounting and Tax Items

During fiscal 2005, certain accounting and tax items affected our reported financial results and the comparability of those results with other periods. These items included the correction of our accounting for leases, the establishment of a sales return liability, the resolution and clarification of various tax matters and the adoption of Emerging Issues Task Force (EITF) Issue No. 04-08, The Effect of Contingently Convertible Instruments on Diluted Earnings per Share. Each of these items is explained more fully below.

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First, we conducted a review of our lease accounting practices in light of the views expressed by the Securities and Exchange Commission (SEC) in its letter dated February 7, 2005, to the American Institute of Certified Public Accountants Center for Public Company Audit Firms. In the letter, the SEC expressed its views regarding certain operating lease accounting matters and the related interpretation/application of these matters under existing GAAP. Following our review, we recorded a cumulative fourth-quarter charge of $36 million pre-tax ($23 million after-tax, or $0.07 per diluted share) to correct our accounting for certain operating lease matters. Of the $36 million pre-tax charge, $15 million was recorded as an increase to SG&A, while the remaining $21 million was recorded as an increase to interest expense. We determined that no restatement was required due to the immaterial impact of the errors on current and prior periods. The adjustment increased our SG&A rate by 0.1% of revenue for fiscal 2005. For additional discussion on the correction of our accounting for leases, see Note 7, Leases, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

Second, we established a sales return liability. The sales return liability represented the gross profit related to consumer purchases expected to be returned after the end of an accounting period. Historically, the year-over-year impact of consumer returns was not material. The establishment of the sales return liability reduced our gross profit for fiscal 2005 by $15 million pre-tax ($10 million after-tax, or $0.03 per diluted share) and reduced fiscal 2005 revenue by $65 million. The establishment of the sales return liability did not affect our gross profit rate for fiscal 2005.

Third, due to the favorable resolution and clarification of certain federal and state income tax matters, we reduced our effective income tax rate for continuing operations to 35.3% for fiscal 2005. In addition, we recorded a $50 million tax benefit in our results from discontinued operations. The $50 million tax benefit related to our former Musicland subsidiary and was the result of the favorable resolution of outstanding tax matters with the Internal Revenue Service. The Musicland tax benefit resulted in an increase to net earnings of $0.15 per diluted share for fiscal 2005.

Finally, we adopted EITF Issue No. 04-08. The calculation of diluted earnings per share for fiscal 2005 assumes the conversion of our convertible debentures, due in 2022, into 5.8 million shares of our common stock, and adds back the related after-tax interest of $6.5 million. The adoption of EITF Issue No. 04-08 reduced diluted earnings per share by $0.03 for fiscal 2005. Prior-year amounts have been adjusted to conform to the current-year presentation.

Unless otherwise noted, this MD&A relates only to results from continuing operations. All periods presented reflect the classification of Musicland's financial results as discontinued operations.

Fiscal 2005 Summary

•

Earnings from continuing operations for fiscal 2005 increased 17% to $934 million, or $2.79 per diluted share, compared with $800 million, or $2.41 per diluted share, for fiscal 2004. The increase was driven primarily by revenue growth, including a comparable store sales gain of 4.3%, and a decrease in our SG&A rate, and was partially offset by a decrease in our gross profit rate. In addition, earnings from continuing operations for fiscal 2005 benefited from net interest income of $1 million, compared with net interest expense of $8 million for the prior fiscal year, and a lower effective income tax rate due to the resolution and clarification of state and federal tax matters.

•

Revenue for fiscal 2005 increased 12% to $27.4 billion, compared with $24.5 billion for the prior fiscal year. The increase reflected market share gains and was driven by the addition of 78 new stores in the past 12 months, a full of year of revenue from stores added in fiscal 2004, the 4.3% comparable store sales increase and the favorable effect of fluctuations in foreign currency exchange rates.

•

Our gross profit rate for fiscal 2005 declined by 0.2% of revenue to 23.7% of revenue, down from 23.9% of revenue for fiscal 2004. The decrease was due primarily to a more promotional environment compared with the prior fiscal year.

•

Our SG&A rate for fiscal 2005 declined by 0.2% of revenue to 18.4% of revenue, down from 18.6% of revenue for the prior fiscal year. The improvement was due primarily to reduced performance-based incentive

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compensation, expense leverage (as revenue increased at a faster rate than operating expenses) from the 4.3% comparable store sales gain and the addition of new stores, and the realization of cost savings from our efficient enterprise initiative.

•

Effective with the cash dividend paid in the third quarter of fiscal 2005, we increased our quarterly cash dividend by 10% to $0.11 per common share. During fiscal 2005, we made four dividend payments totaling $0.42 per common share, or $137 million in the aggregate.

•

During fiscal 2005, we purchased and retired 3.8 million shares at a cost of $200 million pursuant to our share repurchase programs.

•

Also in June 2004, we redeemed all of our convertible debentures due in 2021 for $355 million. No gain or loss was incurred.

•

During 2004, we entered into agreements with Accenture for consulting, as well as support and development services in the human resources and information technology areas, to further enable our anticipated transformation to a more efficient, customer-centric business model.

Consolidated Results

The following table presents selected consolidated financial data for each of the past three fiscal years ($ in millions, except per share amounts):

Note: All periods presented reflect the classification of Musicland's financial results as discontinued operations.

⁽¹⁾

Certain amounts have been reclassified to conform to the current presentation. These reclassifications had no effect on operating income, net earnings, financial position or cash flows. During fiscal 2005, we reclassified from SG&A into cost of goods sold certain expenses related to operating our distribution network, consisting primarily of handling and transportation costs related to moving merchandise from our distribution centers to our stores. We believe that the revised presentation provides greater consistency for investors by aligning the classification of our distribution costs with the practices of many other retailers.

⁽²⁾

Comprised of revenue at stores and Web sites operating for at least 14 full months, as well as remodeled and expanded locations. Relocated stores are excluded from the comparable store sales calculation until at least 14 full months after reopening. The calculation of the comparable store sales percentage gain excludes the impact of fluctuations in foreign currency exchange rates.

During fiscal 2004, we refined our methodology for calculating our comparable store sales percentage gain to reflect the impact of non-point-of-sale (non-POS) revenue transactions. We refined our comparable store sales calculation methodology in light of changes in our business. Previously, our comparable store sales calculation was based on store POS revenue. The comparable store sales percentage gains for fiscal 2005 and fiscal 2004 have been computed based on the refined methodology. The comparable store sales percentage gain for fiscal 2003 has not been computed using the refined methodology. Refining the methodology for calculating our comparable store sales percentage gain did not impact previously reported revenue, net earnings or cash flows.

⁽³⁾

Diluted earnings per share for fiscal 2004 and fiscal 2003 have been restated to reflect the adoption of EITF Issue No. 04-08.

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Continuing Operations

Fiscal 2005 Results Compared With Fiscal 2004

Earnings from continuing operations for fiscal 2005 were $934 million, or $2.79 per diluted share, a 17% increase from $800 million, or $2.41 per diluted share, for fiscal 2004. The improvement was driven primarily by an increase in revenue, including a comparable store sales gain of 4.3%, and an improvement in our SG&A rate, and was partially offset by a decrease in our gross profit rate. In addition, earnings from continuing operations for fiscal 2005 benefited from net interest income of $1 million, compared with net interest expense of $8 million for the prior fiscal year, and a lower effective income tax rate due to the resolution and clarification of outstanding income tax matters.

Revenue for fiscal 2005 increased 12% to $27.4 billion, compared with $24.5 billion for fiscal 2004. The increase resulted from the addition of 61 U.S. Best Buy, 11 Canadian Best Buy and six Future Shop stores in the past 12 months; a full year of revenue from new stores added in fiscal 2004; the 4.3% comparable store sales gain; and the favorable effect of fluctuations in foreign currency exchange rates. The addition of new stores during the past two fiscal years accounted for approximately three-fifths of the revenue increase for fiscal 2005; the comparable store sales gain accounted for nearly two-fifths of the revenue increase; and the favorable effect of fluctuations in foreign currency exchange rates accounted for the remainder of the revenue increase.

We believe our comparable store sales performance for fiscal 2005 reflected improved in-store execution, including our ability to increase the close rate and average ticket, which more than offset customer traffic declines in our stores. In addition, our fiscal 2005 comparable store sales gain benefited from continued demand for digital products and our effective advertising and promotional campaigns, including a full year of Reward Zone, our customer loyalty program introduced in the second quarter of fiscal 2004. Products having the largest impact on our fiscal 2005 comparable store sales gain included digital televisions, MP3 players, digital cameras and accessories, notebook computers, DVDs and major appliances. We believe the increase in revenue from digital products reflected the continued consumer migration to and increased affordability of digital products, while the increase in notebook computers was driven primarily by consumers' continued attraction to the portability of these products.

Our gross profit rate for fiscal 2005 declined to 23.7% of revenue, a 0.2% of revenue decrease compared with 23.9% of revenue for fiscal 2004. The decrease was due primarily to a more promotional environment compared with the prior fiscal year, including a full year of impact from and increased membership in Reward Zone. Reward Zone contributed to the revenue gain for the fiscal year, but reduced the fiscal 2005 gross profit rate by approximately 0.5% of revenue, compared with a 0.3% of revenue reduction in the gross profit rate for the prior fiscal year. In addition, our gross profit rate was affected by a higher level of promotional activity initiated to increase revenue and stem customer traffic declines, a trend we believe was experienced throughout the consumer electronics retail industry. The increase in promotional activity was partially offset by the increase of services revenue in the revenue mix, as services carry a higher gross profit rate, and benefits from our global sourcing initiative which enabled us to improve margins through lower product costs.

At the end of fiscal 2005, we had more than 4.7 million Reward Zone members, compared with more than 2.5 million at the end of fiscal 2004. We continue to believe in the merits of Reward Zone as a vehicle for building customer loyalty. Further, we believe the insights gained from this program are important as we continue to pursue our customer centricity initiative. Under the terms of the program, members earn points for each qualifying purchase completed at U.S. Best Buy stores. After accumulating the required point total, members are awarded a certificate that may be redeemed on future purchases. Certificates awarded to Reward Zone members expire 90 days after issuance. Beginning in October 2004, Reward Zone members were required to spend $150 to earn a $5 certificate redeemable on future purchases. Previously, Reward Zone members earned a $5 certificate after spending $125.

In accordance with EITF Issue No. 00-22, Accounting for "Points" and Certain Other Time-Based or Volume-Based

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Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future, the value of points earned by Reward Zone members is recorded as a liability and a reduction of revenue. The value of points earned by our loyalty program members is included as a liability and a reduction of revenue at the time the points are earned based on the percentage of points that are projected to be redeemed based on historical experience.

During fiscal 2005, we reclassified from SG&A into cost of goods sold certain expenses related to operating our distribution network, consisting primarily of handling and transportation costs related to moving merchandise from our distribution centers to our stores. We believe that the revised presentation provides greater consistency for investors by aligning the classification of our distribution costs with the practices of many other retailers and is consistent with current accounting guidance. However, because retailers do not uniformly record costs of operating their supply chain between cost of goods sold and SG&A, our gross profit rate and SG&A rate may not be comparable to certain other retailers. For additional information regarding costs classified in cost of goods sold and SG&A, refer to Note 1, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Prior years' financial statements have been reclassified to conform to the current presentation.

Our SG&A rate for fiscal 2005 declined by 0.2% of revenue to 18.4% of revenue, down from 18.6% of revenue for the prior fiscal year. The improvement was due primarily to reduced performance-based incentive compensation, expense leverage from the comparable store sales gain and the addition of new stores, and the realization of cost savings from our efficient enterprise initiative. Our fiscal 2005 SG&A rate also benefited from favorable settlements with two credit card companies. These factors were partially offset by additional expenses associated with our customer centricity initiative, and charges to correct our accounting for leases and for the settlement of litigation which, collectively, increased our SG&A rate for fiscal 2005 by approximately 0.2% of revenue.

Fiscal 2004 Results Compared With Fiscal 2003

Earnings from continuing operations for fiscal 2004 increased 29% to $800 million, or $2.41 per diluted share, compared with $622 million, or $1.90 per diluted share, for fiscal 2003. The improvement was driven primarily by an increase in revenue, including a comparable store sales gain of 7.1%, and improvements in both our gross profit rate and our SG&A rate.

Fiscal 2004 revenue increased 17% to $24.5 billion, compared with fiscal 2003 revenue of $20.9 billion. The increase resulted from the addition of 60 U.S. Best Buy, 11 Canadian Best Buy, four Future Shop and three Magnolia Audio Video stores during fiscal 2004; a full year of revenue from new stores opened in fiscal 2003; and the 7.1% comparable store sales gain. For fiscal 2004, the addition of new stores accounted for approximately half of the revenue increase; the comparable store sales gain accounted for approximately two-fifths of the revenue increase; and the favorable effect of fluctuations in foreign currency exchange rates accounted for the remainder of the revenue increase.

Our gross profit rate for fiscal 2004 improved by 0.3% of revenue to 23.9% of revenue, versus 23.6% of revenue for fiscal 2003. The improvement was due primarily to gross profit rate improvements within our product groups and a more effective use of promotions in the Domestic segment compared with fiscal 2003. These factors were partially offset by the impact of Reward Zone. We also experienced a more promotional environment in the International segment compared with fiscal 2003.

Our SG&A rate for fiscal 2004 decreased by 0.2% of revenue to 18.6% of revenue, compared with 18.8% of revenue for fiscal 2003. The decrease was due primarily to expense leverage from the comparable store sales gain and the addition of new stores, as well as the realization of cost savings from our efficient enterprise initiative. Our fiscal 2004 SG&A rate also benefited from a one-time gain of approximately $5 million, pre-tax, associated with the sale of equity securities received in connection with a vendor co-marketing agreement. In addition, our fiscal 2004 SG&A rate benefited from the absence of certain costs incurred during fiscal 2003, including lease termination and asset impairment charges associated with

30

vacating our previous corporate facilities, as well as various expenses in our International segment to support strategic initiatives. These factors were partially offset by increased performance-based incentive compensation as a result of our improved year-over-year financial performance and restricted stock grants awarded pursuant to our long-term incentive compensation program, as well as spending on our customer centricity initiative. Other offsetting factors included reduced funding received from vendor alliance programs and technology asset impairment charges.

Segment Performance

Domestic

The following table presents selected financial data for the Domestic segment for each of the past three fiscal years ($ in millions):

Note: All periods presented reflect the classification of Musicland's financial results as discontinued operations.

⁽¹⁾

Comprised of revenue at stores and Web sites operating for at least 14 full months, as well as remodeled and expanded locations. Relocated stores are excluded from the comparable store sales calculation until at least 14 full months after reopening.

During fiscal 2004, we refined our methodology for calculating our comparable store sales percentage gain to reflect the impact of non-point-of-sale (non-POS) revenue transactions. We refined our comparable store sales calculation methodology in light of changes in our business. Previously, our comparable store sales calculation was based on store POS revenue. The comparable store sales percentage gains for fiscal 2005 and fiscal 2004 have been computed based on the refined methodology. The comparable store sales percentage gain for fiscal 2003 has not been computed using the refined methodology. Refining the methodology for calculating our comparable store sales percentage gain did not impact previously reported revenue, net earnings or cash flows.

⁽²⁾

During fiscal 2005, we reclassified from SG&A into cost of goods sold certain expenses related to operating our distribution network, consisting primarily of handling and transportation costs related to moving merchandise from our distribution centers to our stores. We believe that the revised presentation provides greater consistency for investors by aligning the classification of our distribution costs with the practices of many other retailers. Prior-year amounts have been reclassified to conform to the current-year presentation. The reclassification had no impact on previously reported operating income, net earnings, financial position or cash flows.

Our Domestic segment reported operating income for fiscal 2005 of $1.4 billion, or 5.7% of revenue, compared with $1.3 billion, or 5.7% of revenue, for fiscal 2004. The Domestic segment's operating income rate for fiscal 2005 benefited from revenue gains, including a 4.4% comparable store sales increase, and a decrease in the SG&A rate of 0.2% of revenue, and was offset by a decrease in the gross profit rate of 0.3% of revenue.

Revenue for our Domestic segment increased to $24.6 billion for fiscal 2005, an 11% increase over fiscal 2004 revenue of $22.2 billion. Nearly three-fifths of the increase for fiscal 2005 was due to the addition of new stores in the past two fiscal years. The remainder of the revenue increase was attributable to the 4.4% comparable store sales gain.

We believe the comparable store sales performance of our Domestic segment for fiscal 2005 reflected improved in-store execution, including our ability to increase the close rate and average ticket, which more than offset customer traffic declines in our stores. In addition, we believe our fiscal 2005 comparable store sales benefited from continued demand for digital products and our

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effective advertising and promotional campaigns, including a full year of our Reward Zone customer loyalty program.

All four of our product groups posted comparable store sales gains for fiscal 2005 in the Domestic segment. The consumer electronics group posted a high single-digit comparable store sales gain for the fiscal year driven primarily by sales of digital products, including digital televisions, MP3 players and digital cameras and accessories. These gains reflect continued consumer preference for and the increased affordability of these products. These increases were partially offset by declines in sales of analog televisions. A low single-digit comparable store sales gain in the home-office group was driven primarily by sales of notebook computers, reflecting consumers' continued attraction to the portability of these products. The entertainment software group recorded a comparable store sales gain in the low single digits driven primarily by increased revenue from DVDs and computer software, which was partially offset by decreased sales in video gaming and CDs. The mid-single-digit comparable store sales increase in the appliances group was driven primarily by increased sales of major appliances, resulting in part from expanded assortments, and was partially offset by comparable store sales declines in other products (e.g., small appliances) within the appliances group.

The Domestic segment's gross profit rate declined to 23.8% of revenue for fiscal 2005, a decrease of 0.3% compared with 24.1% of revenue for fiscal 2004. The decrease was due primarily to a more promotional environment compared with the prior fiscal year, including a full year of impact from and increased membership in Reward Zone. Reward Zone contributed to the revenue gain for the fiscal year, but reduced the fiscal 2005 gross profit rate by approximately 0.6% of revenue, compared with a 0.3% of revenue reduction in the gross profit rate for the prior fiscal year. In addition, our gross profit rate was affected by a higher level of promotional activity initiated to increase revenue and stem customer traffic declines, a trend we believe was experienced throughout the consumer electronics retail industry. The increase in promotional activity was partially offset by the increase of services revenue in the revenue mix, as services carry a higher gross profit rate, and benefits from our global sourcing initiative which enabled us to improve margins through lower product costs.

The fiscal 2005 SG&A rate for the Domestic segment declined by 0.2% of revenue to 18.2% of revenue, down from 18.4% of revenue for the prior fiscal year. The improvement was due primarily to reduced performance-based incentive compensation, expense leverage from the comparable store sales gain and the addition of new stores, and the realization of cost savings from our efficient enterprise initiative. Our fiscal 2005 SG&A rate also benefited from favorable settlements with two credit card companies. These factors were partially offset by additional expenses associated with our customer centricity initiative, and charges to correct our accounting for leases and for settlement of litigation which, collectively, increased our Domestic segment's SG&A rate for fiscal 2005 by approximately 0.2% of revenue.

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The following table reconciles Domestic stores open at the beginning and end of fiscal 2005:

Note: During fiscal 2005, we converted 67 existing U.S. Best Buy stores to our customer centricity format and relocated six other U.S. Best Buy stores. No other U.S. Best Buy stores were relocated or remodeled during fiscal 2005. At the end of fiscal 2005, we operated 668 U.S. Best Buy stores in 48 states and the District of Columbia. No Magnolia Audio Video stores were relocated or remodeled during fiscal 2005. At the end of fiscal 2005, we operated 20 Magnolia Audio Video stores in California, Washington and Oregon.

The following table reconciles Domestic stores open at the beginning and end of fiscal 2004:

Note: We relocated four and remodeled three U.S. Best Buy stores during fiscal 2004. At the end of fiscal 2004, we operated 608 U.S. Best Buy stores in 48 states and the District of Columbia. One Magnolia Audio Video store was remodeled during fiscal 2004. At the end of fiscal 2004, we operated 22 Magnolia Audio Video stores in California, Washington and Oregon.

International

The following table presents selected financial data for the International segment for each of the past three fiscal years ($ in millions):

⁽¹⁾

Certain amounts have been reclassified to conform to the current presentation. These reclassifications had no effect on operating income, net earnings, financial position or cash flows. During fiscal 2005, we reclassified from SG&A into cost of goods sold certain expenses related to operating our distribution network, consisting primarily of handling and transportation costs related to moving merchandise from our distribution centers to our stores. We believe that the revised presentation provides greater consistency for investors by aligning the classification of our distribution costs with the practices of many other retailers.

⁽²⁾

Comprised of revenue at stores and Web sites operating for at least 14 full months, as well as remodeled and expanded locations. Relocated stores are excluded from the comparable store sales calculation until at least 14 full months after reopening. The calculation of the comparable store sales percentage gain excludes the impact of fluctuations in foreign currency exchange rates.

During fiscal 2004, we refined our methodology for calculating our comparable store sales percentage gain to reflect the impact of non-point-of-sale (non-POS) revenue transactions. We refined our comparable store sales calculation methodology in light of changes in our business. Previously, our comparable store sales calculation was based on store POS revenue. The comparable store sales percentage gains for fiscal 2005 and fiscal 2004 have been computed based on the refined methodology. The comparable store sales percentage gain for fiscal 2003 has not been computed using the refined methodology. Refining the methodology for calculating our comparable store sales percentage gain did not impact previously reported revenue, net earnings or cash flows.

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The International segment generated operating income of $49 million, or 1.7% of revenue, for fiscal 2005, an increase of 34% compared with $37 million, or 1.6% of revenue, for the prior fiscal year. The improvement was due primarily to revenue gains, including a 3.3% comparable store sales increase for the fiscal year, and an improved gross profit rate, and was partially offset by an increase in the SG&A rate.

The International segment reported revenue of $2.8 billion for fiscal 2005, an increase of 21% compared with $2.3 billion for the prior fiscal year. New-store additions in the past two fiscal years accounted for approximately half of the revenue increase for the fiscal year. The favorable effect of fluctuations in foreign currency exchange rates accounted for approximately one-third of the revenue increase, and the 3.3% comparable store sales gain accounted for the remainder of the revenue increase. The comparable store sales increase reflected market share gains and was driven by increased revenue from MP3 players, notebook computers, digital televisions and digital cameras.

The International segment's gross profit rate was 22.5% of revenue for fiscal 2005, an increase from 22.2% of revenue for the prior fiscal year. The increase was due primarily to gross profit rate improvements resulting from increased vendor allowances and reduced markdowns, and was partially offset by an early contract termination penalty paid to a third-party product warranty insurance provider. The SG&A rate for the International segment increased to 20.7% of revenue for fiscal 2005, compared with 20.6% of revenue for fiscal 2004. The increase was due primarily to the absence of favorable settlements realized in the prior fiscal year related to previously established legal and location closing liabilities. The fiscal 2004 favorable settlements did not have a significant effect on fiscal 2004 consolidated earnings from continuing operations. In addition, our fiscal 2005 SG&A rate was affected by a charge to correct our accounting for leases. These factors were partially offset by expense leverage resulting from new-store openings and the comparable store sales gain, as well as a reduction in advertising expense as a percentage of revenue.

During the fourth quarter of fiscal 2005, we completed our annual impairment testing of goodwill and the Future Shop tradename. Based on expectations for the business and the prevailing retail environment, we determined that no impairment existed. However, if future results are not consistent with our assumptions and estimates, or if we ever were to discontinue the use of the Future Shop tradename as a result of abandoning our dual-branding strategy in Canada or otherwise, we may be exposed to an impairment charge in the future.

The following table reconciles International stores open at the beginning and end of fiscal 2005:

Note: During fiscal 2005, we relocated four Future Shop stores. No Canadian Best Buy stores were relocated or remodeled during fiscal 2005. At the end of fiscal 2005, we operated 114 Future Shop stores throughout all Canadian provinces and 30 Canadian Best Buy stores in Ontario, Alberta, British Columbia, Manitoba and Saskatchewan.

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The following table reconciles International stores open at the beginning and end of fiscal 2004:

Note: During fiscal 2004, we relocated five Future Shop stores. No Canadian Best Buy stores were relocated or remodeled during fiscal 2004. At the end of fiscal 2004, we operated 108 Future Shop stores throughout all Canadian provinces and 19 Canadian Best Buy stores in Ontario, Alberta and Manitoba.

Discontinued Operations

On March 25, 2005, we received notification from the Internal Revenue Service (IRS) of a favorable resolution of outstanding tax matters regarding the disposition of our interest in Musicland. Based on the agreement with the IRS, we recognized a $50 million tax benefit in fiscal 2005.

The sale of Musicland during fiscal 2004 resulted in an after-tax loss on the disposal of discontinued operations totaling $66 million. The results of discontinued operations for fiscal 2004 are included through the date of the sale, June 16, 2003. Fiscal 2003 results from discontinued operations are for the entire fiscal year. For additional information regarding discontinued operations, refer to Note 2, Discontinued Operations, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

The results from discontinued operations for the past three fiscal years are as follows ($ in millions):

⁽¹⁾

Fiscal 2003 included a $25 million tax benefit resulting from the differences between the bases of assets and liabilities for financial reporting and income tax purposes at acquisition, which were expected to be realized upon the disposition of Musicland.

⁽²⁾

Fiscal 2005 gain on disposal of discontinued operations represents the reversal of valuation allowances on deferred tax assets. Fiscal 2004 loss on disposal of discontinued operations is net of $25 million tax benefit offset by a $25 million valuation allowance.

⁽³⁾

In the first quarter of fiscal 2003, we recorded an after-tax, noncash impairment charge of $308 million for the full write-off of goodwill related to our acquisition of Musicland, in accordance with SFAS No. 142, Goodwill and Other Intangible Assets, which was adopted effective on March 3, 2002. In addition, we recorded an after-tax, noncash charge of $8 million for the change in our method of accounting for vendor allowances in accordance with EITF No. 02-16, Accounting by a Reseller for Cash Consideration Received from a Vendor.

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Additional Consolidated Results

Net Interest Income (Expense)

We reported net interest income of $1 million for fiscal 2005, compared with net interest expense of $8 million for fiscal 2004. The change in net interest income (expense) was primarily a result of higher yields on short-term investments, higher average investment balances and the repayment in June 2004 of our convertible debentures due in 2021. These factors were partially offset by a charge of $21 million to correct our accounting for leases.

Net interest expense increased to $8 million for fiscal 2004, compared with net interest income of $4 million for fiscal 2003. The increase was primarily a result of the allocation of interest expense to discontinued operations for fiscal 2003. In addition, net interest expense increased approximately $4 million for fiscal 2004 as a result of interest expense related to the construction of our new corporate campus that was capitalized during fiscal 2003.

For additional information regarding net interest income (expense), refer to Note 6, Net Interest Income (Expense), of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

Effective Income Tax Rate

Our effective income tax rate decreased to 35.3% for fiscal 2005, compared with 38.3% for fiscal 2004. The decrease in the effective income tax rate for fiscal 2005 was due to various state and federal tax matters described below.

During fiscal 2005, we reduced our tax contingencies reserve due to the favorable resolution and clarification of certain federal and state income tax matters, including a favorable ruling from the IRS and the completion of IRS and certain state tax audits for fiscal 2000 through fiscal 2002.

Our effective income tax rate decreased to 38.3% for fiscal 2004, down from 38.7% for fiscal 2003. The decrease was due primarily to a lower effective state income tax rate.

Impact of Inflation and Changing Prices

The impact of inflation and changing prices has not been material to our revenue or earnings from continuing operations in any of the last three fiscal years. Highly competitive market conditions and the general economic environment minimized inflation's impact on the selling prices of our products and our expenses. In addition, price deflation and the continued commoditization of key technology products affects our ability to increase our gross profit rate.

Liquidity and Capital Resources

Summary

We ended fiscal 2005 with $3.3 billion of cash and cash equivalents and short-term investments, an increase from $2.6 billion at the end of fiscal 2004. Working capital, the excess of current assets over current liabilities, increased to $1.9 billion at the end of fiscal 2005, compared with $1.2 billion at the end of fiscal 2004.

Cash equivalents consist of highly liquid investments with original maturities of 90 days or less. Short-term investments were comprised of municipal and United States government debt securities with original maturities greater than 90 days but less than one year. In accordance with our investment policy, we place our investments in debt securities with issuers who have high-quality credit and limit the amount of investment exposure to any one issuer. We seek to preserve principal and minimize exposure to interest-rate fluctuations by limiting default risk, market risk and reinvestment risk.

Historically, we have classified investments in auction-rate debt securities as cash and cash equivalents based on our ability to market and sell these investments at periodic interest rate reset dates. Despite the long-term stated maturities of auction-rate debt securities, the interest rates on these investments are reset periodically in an auction process that generally occurs every 90 days or less, resulting in a highly liquid market for such securities. We have liquidated these investments at the periodic interest rate reset dates as necessary to fund current operations. To classify auction-rate debt securities as a cash equivalent, the stated maturity of the security must generally be within three months of the date of purchase.

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In the fourth quarter of fiscal 2005, we reviewed the classification of our auction-rate debt securities. Based on this review, we reclassified these securities from cash and cash equivalents to short-term investments or long-term investments, as appropriate. Prior-year amounts have been reclassified to conform to the current-year presentation. The reclassification had no effect on previously reported total assets or net earnings.

Our liquidity is affected by restricted cash balances that are pledged as collateral or restricted to use for general liability insurance, workers' compensation insurance and warranty programs. Restricted cash balances, which are included in other current assets, totaled $158 million and $27 million as of February 26, 2005, and February 28, 2004, respectively.

Cash Flows

The following table summarizes our cash flows from operating, investing and financing activities for each of the past three fiscal years ($ in millions):

Note: See consolidated statements of cash flows included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K for additional information.

Operating Activities

Cash provided by operating activities was $1.8 billion for fiscal 2005, compared with $1.4 billion for fiscal 2004 and $778 million for fiscal 2003. The improvement in operating cash flows for fiscal 2005, compared with the prior fiscal year, was due primarily to an increase in cash provided from changes in operating assets and liabilities, as well as increased earnings from continuing operations.

Earnings from continuing operations increased to $934 million for fiscal 2005, compared with $800 million for fiscal 2004. The changes in operating assets and liabilities were due primarily to increases in accounts payable, accrued income taxes and other liabilities, which were partially offset by increased merchandise inventories and other assets. The increase in accounts payable resulted primarily from higher business volumes and the timing of vendor payments. The increase in accounts payable was consistent with the increase in merchandise inventories. Accrued income taxes increased due primarily to the increase in earnings from continuing operations, as well as a reduction in tax benefits realized in fiscal 2005, as compared to fiscal 2004, related to the sale of our former Musicland subsidiary. The increase in other liabilities resulted primarily from growth in our business, including increases in gift card liabilities and deferred revenue. Merchandise inventories increased in fiscal 2005, due primarily to the addition of new stores and changes in product mix, including expanded assortments of digital imaging, home theater and computing products. The increased inventory levels also reflected our efforts to improve in-stock positions in product groups that have been driving our revenue growth. The increase in other assets was due primarily to an increase in workers' compensation deposits, as well as an increase in deposits with Canadian tax authorities.

Investing Activities

Cash used in investing activities was $1.2 billion for fiscal 2005, compared with $1.4 billion and $910 million for fiscal 2004 and fiscal 2003, respectively. The change for fiscal 2005 was due primarily to decreased net purchases

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of short-term and long-term investments in debt securities, as well as reduced capital spending in fiscal 2005 as a result of completing the construction of our new corporate headquarters in April 2003 and the timing of new store projects. Refer to the "Capital Expenditures" section of this MD&A for additional information. In fiscal 2005, we used cash for the construction of new retail locations, information systems, distribution center improvements and other store projects, including the conversion of 67 U.S. Best Buy stores to our customer centricity platform. The primary purposes of the cash investment activity were to support our expansion plans, improve our operational efficiency and enhance shareholder value.

Financing Activities

Cash used in financing activities was $459 million for fiscal 2005, compared with $87 million for fiscal 2004 and cash provided by financing activities of $30 million for fiscal 2003. The change from fiscal 2004 to fiscal 2005 was due primarily to the redemption in June 2004 of our convertible debentures due in 2021 for $355 million and repurchases of our common stock, which were partially offset by increased proceeds from the issuance of common stock in connection with our stock-based compensation programs. During fiscal 2005, we repurchased $200 million of our common stock pursuant to stock repurchase programs authorized by our Board of Directors in fiscal 2005 and fiscal 2000.

Discontinued Operations

Net cash used in discontinued operations was $0 for fiscal 2005, compared with $53 million for fiscal 2004 and $79 million for fiscal 2003. There was no cash used in discontinued operations in fiscal 2005 due to the sale of our interest in Musicland during the second quarter of fiscal 2004.

Sources of Liquidity

Funds generated by operating activities, available cash and cash equivalents, and short-term investments continue to be our most significant sources of liquidity. We believe funds generated from the expected results of operations, available cash and cash equivalents, and short-term investments will be sufficient to finance anticipated expansion plans and strategic initiatives for the next fiscal year. In addition, our revolving credit facilities are available for additional working capital needs or investment opportunities. There can be no assurance, however, that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under our revolving credit facilities.

In December 2004, we entered into an agreement for a $200 million revolving credit facility that is guaranteed by certain of our subsidiaries. The new revolving credit facility expires on December 22, 2009, and replaced a $200 million revolving credit facility that was to expire on March 21, 2005. Borrowings under the new revolving credit facility are unsecured and bear interest at rates specified in the agreement. As of February 26, 2005, and February 28, 2004, $139 million and $197 million, respectively, were available under these facilities. There were no borrowings outstanding under either of these facilities for any period presented. However, outstanding letters of credit reduced amounts available under these facilities.

We also have inventory financing programs through which certain suppliers receive payments from a designated finance company on invoices we owe them. At February 26, 2005, and February 28, 2004, $68 million and $70 million, respectively, were outstanding and $157 million and $140 million, respectively, were available for use under these inventory financing facilities.

In March 2004, our International segment entered into an agreement for a $20 million revolving demand facility, of which $16 million is available from February through July and $20 million is available from August through January of each year. There is no set expiration date for this facility. There were no borrowings outstanding under this facility at February 26, 2005. Outstanding letters of credit and letters of guarantee reduced the amount available under this facility to $15 million at February 26, 2005. All borrowings under this facility are made available at the sole discretion of the lender and are payable on demand. Borrowings under this facility are unsecured and bear interest at rates specified in the agreement. The agreement for this facility contains certain reporting and operating covenants. This facility replaced a $41 million unsecured credit facility, which was canceled on March 1, 2004. There were no borrowings outstanding under this facility at February 28, 2004.

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Our ability to access our credit facilities is subject to our compliance with the terms and conditions of the credit facilities, including financial covenants. The financial covenants require us to maintain certain financial ratios. At the end of fiscal 2005, we were in compliance with all such covenants. In the event we were to default on any of our other debt, it would constitute a default under our credit facilities as well.

We offer our customers extended financing through a third-party financial institution. The third-party institution assumes the risk of collection from our customers and has no recourse against us for any uncollectible amounts. Generally, these financing offers allow customers to purchase products with repayment terms ranging from 90 days to 24 months without a finance charge. Our contract with the third-party financial institution extends through January 2009. If the contract were to be terminated prior to January 2009, we believe we could contract with an alternative third-party financial institution or directly provide our customers with extended financing.

Our credit ratings as of April 29, 2005, were as follows:

⁽¹⁾

In February 2005, Fitch Ratings revised its outlook to positive from stable and affirmed our BBB rating. The outlook revision is based on our improving operating performance and strong balance sheet.

⁽²⁾

In March 2005, Moody's Investors Service revised its outlook to positive from stable and affirmed our Baa3 rating. The outlook revision is based on the success of our initiatives to increase market share while boosting profit margins.

⁽³⁾

In February 2005, Standard & Poor's Ratings Services revised its rating from BBB- with a positive outlook to BBB with a stable outlook based on our operating performance and liquidity levels, improved credit metrics and expectations that we will continue to apply a moderate financial policy in the management of our strategic growth opportunities.

Factors that can impact our credit ratings include changes in our operating performance, the economic environment, conditions in the retail and consumer electronics industries, our financial position and changes in our business strategy. We do not currently foresee any reasonable circumstances under which our credit ratings would be significantly downgraded. If a downgrade were to occur, it could adversely impact, among other things, our future borrowing costs, access to capital markets, vendor financing terms and future new-store occupancy costs. In addition, the conversion rights of the holders of our convertible subordinated debentures could be accelerated if our credit ratings were to be downgraded.

Capital Expenditures

A component of our long-term strategy is our capital expenditure program. This program includes, among other things, investments in new stores, store remodeling, store relocations and expansions, new distribution facilities and information technology enhancements. During fiscal 2005, we invested $502 million in property and equipment, including opening 78 new stores; converting 67 stores to our customer centricity operating model; relocating 10 stores; completing construction of our new Oklahoma distribution center; completing the expansion of our Ontario distribution center; and information technology systems improvements. Capital expenditures are funded through cash provided by operating activities, as well as available cash and cash equivalents and short-term investments.

Refer to the "Outlook for Fiscal 2006" section of this MD&A for information on our capital expenditure plans for fiscal 2006.

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The following table presents our capital expenditures for each of the past three fiscal years ($ in millions):